Economic Analysis of Law

By Bebchuk, Lucian A. | NBER Reporter, Spring 1997 | Go to article overview

Economic Analysis of Law


Bebchuk, Lucian A., NBER Reporter


My general interest is in using economics to analyze the effects of legal rules and institutions. In this article, I describe my current and recent work in the economics of four areas in which legal rules and institutions play a major role: corporate control and structure, bankruptcy, contracts, and litigation and settlement.

Corporate Control and Structure

While much of my earlier work in corporate control focused on takeover bids for companies with dispersed shareholders, my more recent research has focused on companies in which there is a controlling shareholder. In many public companies - both in the United States and (even more so) in other countries - a significant number of shares are concentrated in the hands of a controlling shareholder.(1)

One part of my research has focused on the decisions of controllers about selling their control blocks. In a recent article, I have shown that such decisions often might be distorted.(2) The efficiency costs produced by these distortions should be regarded as arising from having a controlling shareholder structure.

A central feature of the model of control transfers that I have developed is that controllers may differ from each other in two respects: their ability to manage and produce value; and their ability to capture private benefits of control. My analysis shows that, under the existing regime in the United States, inefficient transfers may take place; this will happen when the potential new controller has less managerial ability but a sufficiently greater ability to capture private benefits than the previous controller. Also under the existing regime, some efficient transfers may not take place; this will happen if the potential new controller, although better able to manage the company, has a sufficiently lower ability to capture private benefits.

My analysis also examined control transfers under the equal opportunity rule that prevails in many other countries. Under this rule, minority shareholders are entitled to participate in the transaction on the same terms as the control seller. My analysis shows that adopting the equal opportunity rule would prevent all inefficient transfers, but also would prevent a wider range of efficient transfers. Finally, the analysis has identified conditions under which adding the equal opportunity rule would and would not be efficient overall; for example, adopting the equal opportunity rule would produce an efficiency loss overall if existing and new controllers draw their characteristics from the same distributions.

In a related paper, Jesse Fried and I study the decisions of controllers on whether to effect a freezeout.(3) In a corporate freezeout, which is allowed under U.S. rules, a controller can take the shares of the minority shareholders and provide them instead with consideration exceeding the value of those shares as appraised by the court. Our model shows that decisions on whether to effect a freezeout may be distorted, thus producing another efficiency cost arising from having a controlling shareholder structure. The analysis identifies conditions under which efficient freezeouts might not take place or inefficient freezeouts might take place. We use this model to analyze how alternative legal rules perform with respect to the objectives of facilitating efficient freezeouts and discouraging inefficient ones.

These two projects take as given the existence of control blocks. Another part of my research examines the factors that determine the initial ownership structure. In joint work, Luigi Zingales and I(4) analyze the choice that initial owners make between retaining a complete ownership structure and creating a controlling shareholder structure by selling some shares to the public. We show that, in this choice, private and social optimality might diverge.

The source of this potential divergence is an externality. The initial choice of ownership structure will have important effects on both the initial shareholders and the potential future buyers of control. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Economic Analysis of Law
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.